Monday, October 12, 2015

The Safest Currencies in the World

Forward Looking Approach

Let’s remove day to day exchange rates from the equation and take a forward looking approach. The U.S. dollar is the biggest enigma to investors at the moment, but there are logical reasons for its behavior: Interest rates are likely to increase later this year. With quantitative easing coming to a close, investors are piling back into the U.S. dollar. (For more, see: 3 Factors that Drive the U.S. Dollar.)

The European Central Bank (ECB) plans on purchasing $1.16 trillion in public and private sector bonds by 2016. This will primarily be done in the larger economies: Germany, France and Italy. Aside from Germany, the Eurozone is suffering from high unemployment, and it’s hopeful that injecting money into the economy will provide an assist. Either way, this won't help the euro against the U.S. dollar.

The Bank of Japan (BOJ) recently upped its annual purchases of government bonds to 80 trillion yen from 60-70 trillion yen. The Japanese are fighting hard against deflation. Unfortunately, they’re not realizing that you can’t stop deflation, especially when you have the oldest consumers in the world. Once again, this move will not help the Japanese yen against the U.S. dollar. (For more, see: Get to Know the Major Central Banks.)

Based on the points above, we can see that the U.S. dollar is likely to appreciate (for now), and that the euro and Japanese yen would be high risk. In regards to the euro, the Swiss National Bank (SNB) recently abandoned its currency peg to the euro — a sign of no confidence.

U.S. Dollar
As far as the U.S. dollar is concerned, it looks like a great bet at the moment, but U.S. dollars are Federal Reserve notes. Now consider that the Federal Reserve has $2.2 trillion in Treasury debt and $1.5 trillion in mortgage-backed securities. (For more, see: Trade a Surging U.S. Dollar with These 3 ETFs.)

The U.S. dollar is currently in bull mode, and that’s likely to last for a considerable amount of time. On the other hand, while the Federal Reserve is capable of bailing everyone out, eventually, who’s going to bailout the Federal Reserve? The answer to that question might irritate you, because the answer is likely going to be you the taxpayer. That said, the United States is very good at finding ways to win and there’s no telling what creative ideas those in power will come up with next. Hopefully, a creative solution will be found. But is that something you want to bet on? Probably not.

Norway And Singapore
The Norwegian krone has been known as a safe currency, thanks in large part to Norway having no net debt. The Norwegian krone is also a standalone currency which means it’s not tied to another country’s failures. The krone hasn’t been performing well as of late due to economic data not meeting expectations and falling home prices. The latter has slowed the consumer. However, with a disciplined and responsible system in place, it should remain a good long term bet. (For more, see: Countries that Still Have the Golden AAA Credit Rating.)

Then there’s the Singapore dollar, which has been attractive to investors because Singapore is now seen as the place to hide money for tax reasons. There might be opportunity here, but since this investment wouldn’t be based on something sustainable, consider avoiding.

Then there’s that other currency referred to above, which has yet to be covered.

Gold

According to Dictionary.com, the definition of currency is as follows: “Any form of money in actual use as a medium of exchange.” Therefore, gold applies. The best attributes for gold: can be bought and stored, easily converted to almost any currency, highly liquid, limited supply.

That last point is especially important because it separates gold from all the fiat currencies (not backed by a physical commodity) around the world. Many people want to go back to the gold standard, but others will argue that the gold standard didn’t work either. The truth is that no system is fool proof. While the gold standard had its short-term fluctuations (expected), it lasted for well over a century as well as periods of time prior to the 19th century. (For more, see: How Can I Invest in gold?)

The problem with investing in gold today is that the U.S. dollar is in favor, which usually trades inversely to gold. Even if the stock market and/or economy tanks, gold isn’t likely to hold up because all commodities come down in a deflationary environment. If you look at our small stint of deflation during the financial crisis, you will see that gold suffered prior to the Federal Reserve stepping in. That said, once deflation is realized and accepted, opposed to just a fear, the economy should begin to bottom. It will take time (perhaps years), but this should present a great opportunity to buy gold. When organic growth returns, inflation will ramp up, which will make gold intriguing. In fact, gold could hit new highs.